Why the Florida Keys may be the best hotel investment market in the world

In a hospitality investment climate characterized by concerns ranging from where we are in the cycle, re-urbanization and the flight to the top 25 markets, branded versus independent positioning and the constant threat of new competition, the Florida Keys are a very clear anomaly.

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The island chain connecting Miami and Key West has outperformed virtually every hotel market in the United States in recent decades thanks to its ever-improving stock of destination resort hotels, diverse array of unique experiences, surging Florida population and air lift and statutory restrictions that prevent any material additions to new supply. This has translated into sustained RevPAR growth over the past 30 years of 4% (CAGR) while supply only grew 0.7% over the same period, according to STR.

Hurricane Irma, which directly hit the Keys in September 2017, is now a fairly distant memory. The market is fully back online with most hotels freshly renovated and surpassing pre-hurricane performance levels. The insurance market has fully stabilized and is both liquid and competitive today for hotel owners.

HFF is the most active capital markets intermediary in the Florida Keys. This article examines several factors that help explain why the Florida Keys have become the most sought-after market by institutional investors, public REITs and the savviest private capital sources.

The Florida Keys in a Conch Shell

The Florida Keys are an internationally acclaimed resort destination that attracts world-wide interest and visitation. An ecological wonder, the Florida Keys are home to the only living barrier reef in the continental United States and are unequivocally regarded as the “Sport Fishing Capital of the World.” Quite simply, the Florida Keys offer all the benefits of an exclusive Caribbean resort destination yet retain the safety, security and convenience of remaining in the United States.

With the Upper Keys located merely an hour from Miami International Airport, visitors to the Florida Keys enjoy a full array of outdoor activities including scuba diving, deep sea and backcountry flats fishing, boating, water sports and environmental awareness activities. In addition, there are a myriad of dining options available—most of which feature local delicacies such as Florida Keys Spiny Lobster and locally-sourced Stone Crab Claws in season.

The Florida Keys lodging market has experienced diminishing seasonality in recent years due to the region’s proximity to the massive and growing population residing in South Florida which provides for strong shoulder seasons and a very brief downtime. The Christmas holiday through Memorial Day represent the lodging market’s primary season, when “snow-birds” from the Northeast, Midwest and Europe flock to the tropical oasis. From Memorial Day through Labor Day, the market experiences a minor shoulder season, where performance remains strong with the bulk of the demand coming from “drive-to” guests located throughout Florida as well as some Europeans on summer holiday. September and October provide resorts with a brief respite—a great opportunity to target senior travelers and small groups—as the market gears up again for the rush of demand during the Thanksgiving and Christmas holidays.

Not Just High Barriers – Impossible Barriers to Entry

In 1992, Monroe County adopted and implemented legislation known as the Rate of Growth Ordinance, or “ROGO.” This legislation laid the legal framework for the county to regulate development of both commercial and residential properties. The original basis for ROGO was to significantly limit any development in the Florida Keys to ensure that the entire population could be safely evacuated in a hurricane. In recent years, ROGO has been expanded and championed by conservationists as well.

As it relates to transient uses such as hotels, ROGO has essentially capped the number of transient development rights (“TDRs”) at the amount of existing hotel rooms. In other words, ROGO does not allow any new density of hotels throughout the county. To build a new hotel, a developer must first acquire and demolish existing hotels then use those TDRs to build their new project. TDRs can be transferred with certain geographic restrictions as well as bought/sold on the open market.

In addition to ROGO, the Florida Keys are designated as a county of critical environmental concern. This requires all major projects to be reviewed and approved at both the county and state level, which can significantly complicate and delay the entitlement process. For waterfront sites, as are most hotels, there are often federal approvals required as well. It is not unusual in the Keys for development approvals to take 5 to 10 years or longer.

Furthermore, the Florida Keys have extremely onerous employee housing requirements for hotel development, wetland mitigation requirements and a land development code that typically limits density at no more than 12 hotel rooms per acre. Simply put, investors in Florida Keys hotels do not lose much sleep at night when it comes to contemplating new supply.

Florida Keys Lodging Market Performance

The Florida Keys comprise one of the strongest and most exciting domestic lodging markets in North America. If compared to Smith Travel Research’s top 25 hotel markets the Florida Keys would be the No. 2 RevPAR marketing in the U.S., trailing only New York City in 2018.

Hotel investors have an affinity for this market, not only for its high rates and occupancies, but for its resistance to economic and environmental disturbances thanks to the virtually impossible barriers to entry that control new supply. The Florida Keys had strong and rapid recovery following both the 2008 to 2009 financial crisis and 2017 land fall of Hurricane Irma. During the 2008 financial crisis, United States RevPAR declined by almost 18% while the Florida Keys saw only half of that decline due to a stable occupancy. During the entire financial crisis, the Florida Keys lost a mere 60 bps in occupancy versus U.S. decline of 860 bps. As a lower-hassle alternative to the luxury resorts in the Caribbean and Latin America, with lower accessibility costs and a broader appeal (including the majority of Americans who do not have a passport), occupancy not only stayed stable, but increased +3% year over year in 2009compared to 10% decline for the country.

The resistance to economic and environmental disturbances may also be attributed to the Keys enduring appeal to a very wide range of income, activity, and age profiles. Accessibility to the Keys has never been easier – you can drive there, with or without your boat, motorcycle or RV. The Keys have largely benefited from the growth of Miami and South Florida and is easily accessible to 12 million Florida residents.

Ownership and Transactions Controlled by Elite Lodging Investors

The Florida Keys are among the most sought-after institutional hotel markets in America as a result of high RevPARs, impossible barriers against new supply and rarity of transactional offerings.

The landmark resorts in the Florida Keys frequently surpass pricing of $1 million per room and are closely held by the “who’s who” of public and private REITs, international private investors and family offices and blue-chip private equity firms (please contact HFF for sales comps).

During the first week of April 2019, the industry’s most respected public REIT analysts toured the Florida Keys market and published research and feedback consistent with the public market’s view that the Florida Keys are amongst the most desirable lodging markets in the United States.

In the Jeffries’ article “85 Degrees Without a Passport,” David Katz, Khoa Ngo and Erik Hellquist reported:

“Key West embodies sustainable demand drivers and growth opportunities. Specifically, the market is a "bucket list" destination, benefits from cruise line passengers revisiting the market at a later date, benefits from increasing direct flights out of the NYC, Chicago, Dallas and Atlanta areas, is supported by Florida drive-in guests, remains attractive for European, Asian and South African tourists and is just recently adopting ride-sharing (Uber, Lyft) services.”

In Baird Equity Research’s Real Estate-Hotel REITs Key West Property Tours: Not All Markets Are Created Equal report, similar sentiments were echoed:

“We expect Key West to generate above-average RevPAR growth over the next several years, especially as leisure travel trends remain solid, supply growth remains near zero and the island continues to recover post-Hurricane Irma. Economic trends throughout Florida are quite healthy, which bodes well for drive-to business to Key West; increased airlift to the market should support solid demand overall.”

While the REIT analysts commented specifically on the Key West market, their feedback is true for the entire Florida Keys. While Key West is the largest submarket among the Florida Keys, Key Largo and Islamorada have an added advantage of proximity to Miami and the international air lift into South Florida. Marathon, located in the middle Florida Keys, is also enjoying strong growth as market-wide latent demand fills several recently renovated and redeveloped properties.